The Bureau of Economic Analysis reported today that the growth rate of real GDP slowed to an annual rate of 2.6 percent in the fourth quarter of 2014. That is barely half of the 5 percent rate reported for the third quarter, but still a bit above the 2.4 percent average growth rate since the recovery began in mid-2009. Today’s advance estimate is based on preliminary data and is subject to revision. The average revision from the advance to the third estimate, without regard to sign, is 0.6 percentage points.

Today’s release from the BEA includes a set of inflation estimates that are based on data from the national income accounts and thus represent an independent check on the more widely reported consumer price index compiled by the Bureau of Labor Statistics. The most closely watched of the BEA’s inflation indicators is the index for personal consumption expenditures (PCE index), which is used by the Federal Reserve as a guide to monetary policy. The PCE index decreased at a -0.5 percent annual rate in the quarter, putting it far below the Fed’s official target of +2 percent. A supplementary market-based version of the PCE index fell even more rapidly, at -1.1 percent. The market-based index excludes financial services and other items for which there are no observable market prices.

Most of the reported decrease in the price level was due to falling energy prices. The core PCE index, which excludes food and energy, increased by 0.7 percent for both the standard and market-based versions.

As the chart shows, all three versions of the PCE index have been trending down over the past three years. However, that does not mean that the US is following the Eurozone into outright deflation. For one thing, even the weakest of the US indicators, the market-based PCE index, is still up by 1 percent compared with its level a year ago. That contrasts with the case for the EZ, where prices have fallen on a year-over-year basis. In addition, as explained in this recent post, deflation that is driven mainly by supply-side factors, such as improving productivity or a decrease in import prices, is not “real” deflation that carries a risk of a self-reinforcing downward spiral. Instead, as the US case demonstrates, supply-driven decreases in the price level are not inconsistent with healthy growth of real GDP.

Whether or not the latest data herald “real” deflation, they will be heeded by policymakers at the Fed. On the whole, unless both the growth rate and PCE inflation are revised strongly upward, today’s numbers decrease the likelihood of an early tightening of monetary policy.